“More Paper Than A Stationary Store” – Stockbroker Fraud
Today’s Wall Street Journal ran a cover story about margin debt and the dangers it poses for unsuspecting or unsophisticated investors. One of those unsuspecting investors, Edith Steirman, is a woman in her 80’s. According to the Journal, she allegedly “borrowed” $3,525 on margin from Merrill l Lynch in the 1980’s. Recently she received a letter from her brokerage firm threatening her with forced liquidation. Her broker says that the margin debt has now grown to over $65,000 because of interest.
Steirman says she was shocked to find out she owed anything at all let alone so much. Why didn’t she say something sooner? She says she didn’t know about the debt until the letter. Unfortunately, we have heard similar stories before.
According to the New York Stock Exchange, investors owe $435 billion in margin debt. In a margin account, the brokerage firm lets you borrow against the value of your investments. You can leverage your investments and buy even more. Of course, if the market goes against you, you could be quickly wiped out. Worse, you could still owe the brokerage firm for monies you borrowed if the stocks in your account don’t cover the debt.
Those folks living on fixed income, conservative investors and many others probably should not be on margin. It isn’t for the unsophisticated either. Some unscrupulous stockbrokers put clients in margin accounts simply so they can collect more commissions. Let’s use a hypothetical. The purchase of 1000 shares of XYZ stock generate a $200 commission. If your broker puts you on margin and borrows against that stock, perhaps you can buy 500 more shares and he earns another $100 in commission.
Ms. Steirman says she simply wrote a check and purchased $240,000 in a mutual fund back in 1987. She says she never borrowed on margin or authorized her stockbroker to do so. Why didn’t she notice until now?
Steirman, like many of our clients, says she simply didn’t understand the codes on her statements. She simply looked at the statement’s bottom line. As she puts it, she receives “more paper than a stationary store.” Not until she received a threatening letter did she realize that she was even on margin.
Ms. Steirman didn’t know she was on margin. Many other investors are on margin but shouldn’t be. We usually hear from these folks after a sudden change in the market when they suddenly find their portfolio wiped out and even find themselves in debt.
Stockbroker fraud takes many different forms. Industry suitability rules and “know your customer” requirements say that brokers must learn and understand your needs and comfort levels and only make recommendations suitable for you. Of course, if you pick an investment or decide to go on margin without any influence from the broker, the broker is probably not responsible.
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Lose money because of a bad stockbroker or investment adviser? The stockbroker fraud lawyers at Mahany & Ertl concentrate in fraud recovery. Our minimum loss criteria is $200,000, but sometimes we will consider smaller cases if there are several investors with similar claims against the same broker or brokerage firm.
Need more information? Contact attorney Brian Mahany at or by telephone at (direct). Most stockbroker fraud cases handled on a contingent or success fee basis meaning no legal fees unless we are successful.